ECB pushes banks on ‘survival period’ after Credit Suisse fiasco

THE European Central Bank (ECB) is pressing banks for detail on how long they’d expect to survive a funding crisis as it steps up scrutiny of liquidity risks after the unravelling of Credit Suisse Group and several US regional banks.

The regulator is giving greater prominence to the so-called survival period metric in its recent discussions with banks after rapid outflows at the Swiss bank highlighted the shortcomings of measures that are publicly disclosed, according to people with knowledge of the matter. The survival period measures how long a lender can be expected to keep operating with available cash and collateral and no access to funding.

A spokesperson for the ECB declined to comment.

The recent banking turmoil has thrown into question how prepared banks truly are to withstand strain on deposits and whether the data that investors typically use to measure their ability to withstand stress, such as the liquidity coverage ratio ( LCR), is adequate. The ECB started pushing banks to look more closely at liquidity in late 2021 as higher inflation pointed to rising funding costs, yet the recent turmoil heightened the scrutiny, the people said.

The survival period is an undisclosed metric and intended to complement the LCR, which measures a lender’s high quality liquid assets as a share of the outflows it would expect to see over 30 days of stress. All European banks are required to keep that ratio above 100 per cent and bigger lenders tend to publish the figure on a quarterly basis.

In a 2019 stress test by the ECB, the median horizon for the survival period was about four months in an extreme scenario that included “severe deposit run-offs” and “pronounced withdrawals” of committed funding lines.

So far, the ECB’s attention to the topic reflects caution rather than acute concern and is part of its wider scrutiny of the sector, the people said. European regulators and bankers frequently highlight differences to Credit Suisse, which saw a rapid loss of confidence after years of compliance lapses, and regional US banks that were subject to more lax regulation.

Survival data

Data on the survival period for individual banks has improved significantly since the sovereign debt crisis of 2010 to 2012, when the risk of the euro area splintering weighed heavily on many lenders, said one of the people.

Publicly available data also suggest the banking system has ample funding. The weighted average LCR for European banks stood at 165 per cent in the fourth quarter, well above the 100 per cent minimum, according to the European Banking Authority.

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Regulators have previously said that meeting LCR requirements isn’t a guarantee that banks will avoid collapse: Credit Suisse was forced into an emergency rescue by UBS Group after a matter of days, well short of the monthlong period used to calculate LCR. The bank saw wealth management clients withdraw large sums of money.

In a nod to the speed at which bank runs can take place, the regulator is also looking at lenders’ ability to manage liquidity on a daily basis, said one of the people.

The ECB wants to ensure banks are sufficiently rigorous when holding internal stress tests on liquidity management, said the people. Deposits are a particular point of attention and banks will be challenged on whether they’re too optimistic when estimating whether individual clients would withdraw money if the bank runs into trouble or if other lenders offer higher interest rates for savings, said the people. BLOOMBERG